Being a huge Marvel fan, the month of April delivered what I’ve been waiting for…the Endgame. Avengers: Endgame provided the final chapter to the gigantic Infinity War cliffhanger, and I thought it was absolutely fantastic.
Ironically, the S&P 500 has been stuck in its own cliffhanger the past 15 months, oscillating wildly, mostly between ~2,900 and ~2,500. In fact, over the trailing 15 months, dating back to January of 2018’s high at 2,872.87, the S&P 500’s maximum drawup the past 15 months sits at just 2.83% using our fresh new all-time high at 2,954.13. The maximum drawdown over the same time period, when also measuring back to January 2018’s high at 2,872.87, records at -18.32%. It felt like our bull market was dusted in December, but it’s magically sprung back to life with one of the most impressive four-month price thrusts the S&P 500 has ever recorded. It’s left everyone wishing they could suit up and dive into the quantum realm to travel back to 12/24/2018 and buy anything and everything in sight. However, the reversal since December only recovers that which was lost, it brings back the price of the S&P 500 that was dusted, and it leaves us now face-to-face with the market’s version of Thanos…the ~2,940 price region. Thanos decisively won round 1, like the battle on Titan, in September 2018. But round two is now underway and that’s why “we’re in the Endgame” (the title of the blog is not meant to suggest the market’s imminent demise). The bulls now have an opportunity to breakout decisively above the ~2,940 price region, to defeat Thanos, and put the car back into drive. If art imitates reality, there’s a very, very good chance the rematch at the ~2,940 price region isn’t going to go Thanos’ way.
First, like any good fight scene in an Avengers movie, it’s reasonable to anticipate ups and downs, ebbs and flows, the S&P 500 taking two steps forward and then one step back, or vice versa. This blog post is not centered on what’s coming over the next 1, 2, or 3 weeks, but instead is focused on what my work leads me to believe is most likely over the remainder of 2019. As always, I don’t have a crystal ball, nobody does, and studying the past isn’t predictive (see December 2018). However, from a behavioral perspective, when the S&P 500 is being this kind over a rolling four-month period, it’s almost always continued to be kind over the forward 12 months. Here’s some of the evidence.
Strength Begets Strength
As of April’s monthly close, the S&P 500 is higher by 17.51% the last four months. When analyzing all instances of rolling four-month periods with price-only returns of 15% or more, we can find the rationale behind the idea that “strength begets strength”. Newton said it best; objects in motion stay in motion.
The premise behind this is behavioral. Market participants have demonstrated a salacious appetite to bid the S&P 500 the last four months, whether through futures, ETFs, or individual constituents. When they’re this hungry for the S&P 500 in the present, it’s only because their work (whether technical, fundamental, macro) leads them to believe in the story of higher prices into the future. The table below details all four-month periods where the S&P 500 gained 15% or more, with no additional criteria or context. The index has then closed higher 6, 8, and 12 months later 80% of the time for average returns of 6.65%, 9.15%, and 12.47% respectively. The path the S&P 500 has traveled over the forward one year has been skewed to the upside, with the average maximum forward 12-month drawup recording at 18.94% and the average maximum forward 12-month drawdown recording at -6.87%. With April’s close at 2,945.83, this would suggest a forward 12-month range between ~2,743-3,503. The sequence is of course the unknown - most would prefer Thanos gets the upper hand first, and the Avengers get the final say (i.e., a trade down toward ~2,743 sooner rather than later and a trade up to ~3,503 later rather than sooner).
Linear Momentum - 4-0 To Start The Year
Not only is the S&P 500’s price-only return gigantic the last four months, we also have a perfect start to the calendar year. Directional momentum can be scored, like viewing the market as a 12-inning baseball game. The bulls are up 4-0 with 4 innings in the books. This type of upward persistence in the start of a calendar year has almost exclusively been associated with a continued advance in the price of the S&P 500, especially when the fourth inning (i.e., the month of April) closes at an all-time high monthly close. There are only 10 prior calendar years that started 4-0 through 4 innings, with April closing at an all-time high, so this is certainly a crime of small numbers. That said, the S&P 500’s price-only returns the remainder of the calendar year are undefeated in all 10 prior samples, for average returns of 11.67%.
Unless this time is different, Thanos doesn’t stand a chance.
Linear Momentum - 0-4 To Start The Year
The Volatility Index (VIX) just recorded the exact opposite of the S&P 500, having declined 4 consecutive months to start the year. The complete and total collapse in “nervousness” across participants is often thought of as a sign of complacency across participants, but it has been almost exclusively trend promoting for the S&P 500 since 1990. Here are all instances of the VIX declining 4 consecutive months since 1990. The S&P 500’s forward returns are almost exclusively positive across all time frames measured, although the sample in May of 1990 is enough to remind of the old saying “when the VIX is low, look out below”.
Keeping Us Honest - Pre-Election Years From April, Meh
In my last post, which you can read by clicking here, I discussed the idea of a second-half slowdown, a Q3 or Q4 correction, as it’s been a calling card of pre-election years recently. I still think this is still likely here in 2019. While pre-election years are known as sunny skies for the S&P 500, their sunshine tends to be mostly front loaded. Here’s the S&P 500’s price-only returns from April’s monthly close over the forward 1 year. The casual observation is that there’s a lot more red on this table than any of the other tables I’ve shared in this post. Perhaps the red signifies that when you battle Thanos and his troops, there will be some bloodshed. A December close that’s below 2,945.83 would certainly be disappointing.
The final act of Endgame was epic, and that’s putting it lightly. It was filled with action, or volatility in market terms, but as you’re all probably aware, the good guys always win in superhero movies, it’s just a matter of time. Putting it all together, I continue to believe there’s a meaningful drawup that lies ahead over the course of 2019. Participating in the drawup won’t be easy…it never is. There will likely be volatility, a correction, and time periods where it appears Thanos has the upper hand. But long-term investors can’t let the fear of Thanos keep them from playing the game. Long-term investors have to pick a side, and if the equity market bulls are analogous to the Avengers, it’s best to side with the Avengers, since the good guys always win over time. For now, the primary trend is reasserting itself as up or “bullish”, the 15-month trading range is likely to resolve favorably, and Thanos at the ~2,940 level will eventually meet his demise. Until then, enjoy the endgame, it’s certain to entertain.